Dollar reverses loss after Obama speaks

Yen under pressure; euro benefiting from ‘short squeeze’

By

DeborahLevine

WilliamL. Watts

SAN FRANCISCO (MarketWatch) — The dollar caught a bid against major currencies late in Wednesday trading after stocks fell following comments from President Barack Obama that intensified worries about Washington’s ability to keep the U.S. economy from going over the so-called fiscal cliff.

The dollar initially extended losses after minutes from the Federal Reserve’s policy meeting last month hinted at more bond purchases after the end of year.

However, the yen stayed down as Japan appeared to move closer to an election before the end of the year.

Fed looks to send clear rate signals

(4:26)

The Federal Reserve is inching closer to revamping its communication strategy by stating more explicitly than ever before what would get policy makers to raise short-term interest rates.

The ICE dollar index
DXY, -0.30%
which measures the U.S. unit against a basket of six major currencies, turned up to 81.111 from 81.097 in late North American action on Tuesday.

It spiked down to 80.902 after the minutes were released.

The euro
EURUSD, +0.0000%
clung to gains, however, buying $1.2739 from $1.2706 on Tuesday.

Investors expect the Fed to continue part of the Operation Twist program — buying long-term Treasurys — while letting the short-term sales expire, in effect expanding its program known as quantitative easing, or QE, beyond large-scale purchases of mortgage-backed securities — something to which the Fed’s committed to doing as long as necessary. Read more in Treasurys pare loss; fiscal cliff, Fed in focus.

An apparent agreement of the need for follow-up policy was expected to weigh on the dollar, Steven Englander, a currency strategist at Citi, said before the minutes’ release.

In Asian trading, the dollar lost ground following comments from Fed Vice Chair Janet Yellen signaling support for holding official U.S. interest rates lower for longer.

In a speech late Tuesday, Yellen backed what would be a major change in the central bank’s communication policy, saying the Fed should tie rate hikes to specific levels of unemployment and inflation. See: Fed's Yellen backs new way to give guidance.

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